Here's What To Make Of Ace Edulink's (GTSM:6764) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So while Ace Edulink (GTSM:6764) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Ace Edulink is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.32 = NT$195m ÷ (NT$1.2b - NT$592m) (Based on the trailing twelve months to June 2020).

Thus, Ace Edulink has an ROCE of 32%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

See our latest analysis for Ace Edulink

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ace Edulink's ROCE against it's prior returns. If you're interested in investigating Ace Edulink's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Ace Edulink's ROCE Trend?

In terms of Ace Edulink's historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, two years ago it was 56%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Ace Edulink has done well to pay down its current liabilities to 49% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 49% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From Ace Edulink's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Ace Edulink. However, despite the promising trends, the stock has fallen 21% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

While Ace Edulink doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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